Initial Coin Offerings - What are your rights? What are your obligations?

The Australian Securities and Investments Commission (ASIC) has recently released an information sheet on the potential obligations associated with initial coin offerings (ICO). 

The release of these guidelines calls for caution to be exercised if you are an investor, issuer or otherwise in the business of dealing with digital currency or ‘coins’ issued through an ICO.  In essence, the nature of the coins of an ICO, including the rights attached to the coins,1 will determine whether the product is subject to regulations under the Corporations Act 2001 (Cth), the Australian Consumer Law and other licence requirements.2

What is an ICO?

An ICO is a novel type of online fundraising used by individuals, start-ups and other businesses.3  The process involves investors purchasing coins with a digital currency or cryptocurrency via a blockchain internet platform.4  The blockchain platform is the software technology facilitating the online trade of virtual currencies, such as Bitcoin and Ethereum.5  Basically, anyone with access to the internet can participate in the investing or issuing of coins through an ICO.6

What does the ASIC information sheet tell us?

What is the legal status of an ICO?

The ASIC information sheet reveals that an ICO offer may be characterised as a number of different financial products, such as managed investment schemes, shares or derivatives.  The legal status of the investment can be determined by factors such as the benefits received by investors, the intended use of the funds by the issuing business and the form of the ICO offer.7

In the United States, the interest received by an investor in an ICO may be classified as a ‘security’, in which case the product is subject to the federal securities laws.8  Likewise, ASIC explains that if an ICO investment in Australia is classified as a share or other financial product, then it will be subject to the regulatory obligations associated with that product.9  

For example, if the purpose of an ICO is to fund a company’s operations and the investors are given entitlements such as voting rights, ownership rights or any other rights to participate in the operations of the company, then the product offered is likely to come within the definition of a ‘share’ under the Corporations Act 2001 (Cth).10  In this case, the issuer will be obliged to comply with the disclosure requirements associated with offering shares to the public, including the issue of a prospectus.11

Do you need a licence to conduct an ICO?

The information sheet considers that the platform facilitating the trade of coins through an ICO may constitute a financial market.12  This may be the case in circumstances where the coins being traded are classified as financial products.  Anyone who operates a financial market in Australia is required to hold an Australian Market Licence 13  or otherwise obtain an exemption.14

Is an ICO a form of crowd-sourced funding?

ASIC notes that an ICO is not a type of crowd-sourced funding.15   An ICO involves the issue of digital assets or coins, which can be traded for other cryptocurrencies.16  Crowd-sourced funding is usually utilised by small scale businesses and start-ups and directed to retail investors.17  Crowd-sourced funding is subject to specific regulations under the Corporations Act 2001 (Cth), which do not apply to ICOs.18  Furthermore, the information sheet also suggests that an ICO platform is unlikely to be a non-cash payment facility, which would require a financial services licence and be subject to other disclosure and regulations.19

Does the Australian Consumer Law apply to an ICO?

The Australian Consumer Law prohibits misleading and deceptive conduct which applies in various contexts,20  such as in trade or commerce 21 and in connection with financial services or products.22  ASIC warns issuers of coins through an ICO to be aware of their obligations to not mislead or deceive or provide false information to investors.

Further information

The ASIC information sheet is a notice to all individuals and businesses dealing with ICOs to know their obligations and rights. If you are an issuer of coins through an ICO or are thinking about becoming an issuer, it will be important for you to know how to promote and categorise your product and to obtain any necessary licences to achieve your intended outcome. Similarly, if you are an investor, it will be essential to know your rights with respect to the specific type of financial product you are purchasing.

If you are dealing in this space and require further information, please contact a member of Lavan’s Corporate Services team or Cyber and Data Protection team.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.